Fitch: Tanker Shipping Oversupply to Keep Rates Low

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Oversupply in the tanker shipping market is expected to keep the rates low in 2018 while a glut can be noticed in delivering new vessels combined with limited scrapping of older ships. This move is expected to keep keep the freight rates low and the credit metrics under pressure in 2018.

Capacity may increase by the end of 2017:

The maritime industry hopes to see an increase in capacity of 5%-6% by end-2017. They forecast is further expected to rise by another 4% in 2018. This move reflects the orders placed in 2015 when tanker rates were high, with a large share of orders coming from Greece and China.

Scrapping rate increases:

Propelled by higher steel prices, the vessel scrapping has increased slightly with only five very large crude carrier (VLCC) class tankers were scrapped in the first seven months of this year, while 36 new VLCCs were delivered in roughly the same period.

Demand rates to increase:

Demand growth will probably trough in 2017 due to high global oil inventories and OPEC production cuts. There is an expectation of rising global oil consumption, higher US exports and gradually moderating oil inventories to drive a moderate increase in tanker demand in 2018. Demand could therefore rise by about 4%, potentially matching supply growth.

This should halt the market’s deterioration, but tanker rates are unlikely to receive a significant boost without further vessel scrappage or slower capacity growth. As a consequence, the tanker rates are expected to remain at current low levels throughout 2018 though they should avoid the sharp falls of the last two years. Rates for Suezmax vessels dropped by 39% in the first 10 months of 2017 following a 52% decline in 2016.

Credits under pressure:

This move is expected to keep credit metrics at shipping companies under pressure in the year ahead, although liquidity risks are limited due to generally healthy cash positions that are further enhanced by credit facilities. Companies with a large share of long-term contracts, such as Soechi and Sovcomflot, should be able to maintain relatively healthy operating profits, while those with few long-term contracts are likely to break even at best.

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Source: Fitch Ratings

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